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There was good news for global growth this week – with China's Q1 GDP beating expectations (see international section) and the IMF lifting its global growth forecast for 2024 once more. SA economic data releases, however, were mixed, with a welcome downtick in CPI inflation but relatively poor internal trade data.
Most of the world’s economic policymakers were in Washington for the IMF/World Bank spring meetings, which took place against a particularly tense geopolitical backdrop. Over the weekend, Iran launched a huge drone and missile attack on Israel, while Russia seems to be upping the ante with its invasion of Ukraine. The Iranian attack was, however, anticipated in advance, and with help from allies, Israel was able to limit the damage. Western leaders urged Israel to show restraint in its response to Iran – but Israel was firm that it wanted to make its “own decisions”. There are reports that Israel launched an attack on Iran overnight. At the time of publishing, it is unclear what the attack entailed, how damaging it was and whether it was only directed at military sites or wider. Earlier in the week, Iran warned that it would review its nuclear stance should Israel threaten its atomic sites.
Despite (more) armed conflict involving Russia and Iran – big oil producers – the Brent crude oil price was fairly well-behaved this week (until this morning) and even dipped below $90/barrel on Monday. A possible retaliation from Iran was expected, which meant that the actual event did little to the price (if anything, the limited damage contributed to Monday’s decline as markets may have expected worse). The spot price was down by 1.3% yesterday from last week Thursday and traded around $88/89 per barrel for most of the week. The price spiked above $90/barrel this morning as markets turned risk-off following news of the Israeli attack on Iran. The current demand and supply fundamentals would normally suggest a lower oil price. This means there is a significant geopolitical risk premium in the price. However, there is concern that a sustained spike in the oil price would fuel inflation and reverse the expectations for rate cuts – with detrimental impacts for economic growth (and thus oil demand and prices over time). This should keep some sort of cap on price gains. That said, spikes (temporary or more sustained) in the oil price remain a real possibility. While mulling over more sanctions on Iran, the US will reimpose oil sanctions on another oil producer, Venezuela. In October 2023, the country was given a six-month reprieve on the condition that it would hold a fair election this year. Instead, president Nicolás Maduro has banned the main opposition party from participating.
The theme of ‘higher for longer’ interest rates is becoming increasingly true for the US, but not necessarily for the major banks in Europe. At the spring meetings, Christine Lagarde confirmed that the European Central Bank (ECB) bank would likely cut rates soon (barring any major surprises that could derail the slowdown in inflation – oil prices being top of mind). There were conflicting comments from Bank of England (BoE) officials this week, but some analysts now see the first cut in May. The situation in the US is, however, very different with sticky inflation, solid economic data (the bumper retail sales report is unpacked in the international section below), and recent ‘Fed speak’ all signalling that interest rates could remain on hold for longer. Indeed, some market players are suggesting that keeping rates at current levels will not be enough and that further hikes may be necessary to curtail inflation in the US. This is not our baseline view, but the probability of such a scenario is becoming increasingly likely. Moreover, the IMF’s forecast for US GDP growth in 2024 is remarkable. Not only is growth expected to accelerate from 2023 (2.3%), it is expected to be double the rate of any other G7 country. The IMF was critical of the ballooning fiscal deficits in the US (and China) and argued it would not only complicate its path to lower inflation but also pose significant risks to the global economy. The IMF estimates that the US will record a deficit of 7.1% to GDP next year – this is more than triple the average of other advanced economies. In all, the 0.6%pts upward revision to US growth contributed to a 0.1%pt upward revision to global growth to 3.2% in 2024. This is unchanged from 2023, and set to remain unchanged at 3.2% in 2025.
In contrast, the IMF is downbeat about SA GDP, with growth of just 0.9% expected in 2024. This is below our (downwardly revised) growth forecast of 1.3% and the consensus view for 1.1% growth. Clients can access our latest forecast data here, with an executive summary of the narrative underpinning the forecast here – both were updated this week. The IMF’s forecast for 2024 is now almost a full percentage point below the fund’s October view – global growth was upwardly revised by 0.3%pts over the same period.
Coming back to financial and commodity markets, the rand suffered from the broad-based dollar strength as markets further scale back US Fed rate cut expectations. Of course, the strong dollar or weaker euro (and rand) may prevent the ECB (and SARB) from cutting interest rates. While both have made it clear that they watch, not follow, the Fed, they are definitely keeping a hawk's eye on currency developments. Weaker currencies tend to fuel inflation, and should the banks no longer see inflation slow, rate cuts will be off the table. Unfortunately for domestic consumers, this is probably more true for the SA than the Eurozone as our currency is under more pressure amid SA (and EM) idiosyncrasies. Indeed, the rand lost 2% against the dollar, but also lost ground against the euro and UK pound last week. The rand weakened amid this morning’s risk-off trade. After a sharp increase the week before, the 10-year SA government bond yield was largely unchanged. US 10-year bond yields have been firmly above 4.5% in recent days on the ‘higher for longer’ narrative.
The gold price stayed high last week and rose further this morning, but platinum suffered a steep weekly loss. Global stock markets, particularly in the US, were generally lower through last week. The local JSE Alsi followed, and despite doing somewhat better yesterday, closed 2.7% down w-o-w.
The usual slew of preliminary PMI figures for April will be released on Tuesday. But Thursday’s release of US Q1 GDP data (advance estimate) will receive more attention. The US consumer still seems very supportive of the economy, with little sign of it having lost momentum in the first months of 2024. There could be some upside to the general expectation of a slowdown to below 3% growth from 2023Q4’s 3.4% q-o-q expansion. The Fed’s preferred measure of price changes is due for release on Friday. A beat on either the GDP or PCE price data could push out the expectation for the first US interest rate cut even more – with the reverse also true.
The Bank of Japan (BoJ) will make an interest rate decision next week, although no changes are expected. The yen is under severe pressure and has slid to its lowest level against the dollar since 1990. Policymakers have previously said that they are fully prepared to intervene in the currency market, and we could see more such remarks from the BoJ.
It is a quiet week on the domestic front with the SARB’s leading business cycle indicator for February out on Tuesday and Stats SA’s producer price inflation (PPI) data on Thursday. Unlike CPI, where February was likely the peak (see the domestic section for more), we expect that February will turn out to be a low point for PPI inflation, with it trending up in the coming months. We have pencilled in an acceleration to 4.8% y-o-y in March from 4.5% in February. A turnaround in transport inflation, from a monthly contraction to a monthly uptick, explains part of the quickening PPI. It should remain elevated through Q2 and the first months of Q3, but drop in the last months of the year.
According to Stats SA, headline consumer inflation (CPI) moderated to 5.3% y-o-y in March, down from 5.6% y-o-y in February. This was primarily due to a softer increase in food prices (up 5.1% y-o-y in March vs 6.1% y-o-y in February). However, there are potential upside risks to the food inflation outlook, particularly in categories like bread and cereals due to maize crop failure in SA. Meanwhile, stubbornly high transport inflation persisted in March, only ticking down by 0.1% pt to 5.3% y-o-y in March. On a monthly basis, headline CPI rose by 0.8% in March, down from a solid 1.0 % rise recorded in January. Core inflation, which excludes food and energy costs, moderated slightly to 4.9% y-o-y in March from 5.0% y-o-y in February.
Looking ahead, we anticipate headline CPI for 2024 to have peaked in February and to continue moderating throughout the rest of the year, although not necessarily in a linear fashion and generally remaining above the SARB midpoint target of 4.5%
Stats SA also released a slew of internal trade data this week. In February, real retail trade sales declined by 0.8% y-o-y, following a downwardly revised 2.0% decline in the previous month. Retailers in textiles, clothing, footwear and leather goods reported the steepest decline, with sales tanking 6.8% y-o-y, shaving 1.1% pts off the annual figure. However, on a monthly basis, seasonally adjusted (sa) real retail sales rebounded in February, rising by 0.4% following a solid 3.2% decline in January. Annual real wholesale trade sales also fared poorly in February, declining by 2.0% y-o-y after a 4.9% contraction in January. This continued a downward streak that now stretches for six months. Nonetheless, real wholesale trade (sa) increased notably by 2.7% m-o-m in February, following an upwardly revised 1.6% gain in January – this bodes well for quarterly GDP.
On a positive note, real motor trade sales increased by 1.5% y-o-y in February after a 2.7% expansion in January. Growth in sales was mainly driven by a 4.5% y-o-y expansion in the number of new vehicles sold, which contributed 0.9% pts to the annual figure. However, compared to January, real motor trade sales (sa) declined by 0.7% in February.
China's GDP grew by 5.3% y-o-y in 2024Q1, up from 5.2% in Q4. This was more robust than expected, as a Reuters poll estimated growth of 4.6%. Growth was mainly driven by strong growth in high-tech manufacturing, which contributed to a solid 6.1% increase in industrial production in Q1. Manufacturing of electronic equipment, charging stations for electric vehicles (EVs), and 3D printing surged by 40% y-o-y in Q1. Investment in fixed assets such as factories, roads, and power grids increased by 4.5% (YTD) compared to last year's period – boosted by a 9.9% increase in manufacturing investment, offset by a 9.5% fall in property investment. Retail sales were also up 4.7% in Q1 boosted by increased spending on catering services, cigarettes and alcohol, and sports and entertainment activities. China has set a GDP growth target of about 5% for the year, and while we expect growth to slow in Q2, it certainly is off to a good start to achieve this goal.
US retail sales grew by 4% in March y-o-y, following an upwardly revised growth of 2.1% in February. On a monthly basis, retail sales rose by 0.7% (more than double the consensus forecast) from 0.9% in February. Though the pace is slower, this is the second consecutive month of retail sales growth. A robust job market is supportive of continued growth in retail activity. On that note, average job gains were 276 000 in Q1, compared to 212 000 in Q4, and wage growth remains above 4% y-o-y. This bodes well for retail sales (and US GDP).
The UK economy grew by 0.1% in February compared to January, boosted by industrial production and manufacturing, especially in the car industry. Activity in the construction sector was dampened by wet weather and is expected to bounce back when weather conditions improve. This is the second month in a row, and raises the likelihood of the UK economy expanding in the first quarter of the year, marking an end to the 2023H2 technical recession. Still, pressures remain as consumers are facing a low-growth environment with high taxes and inflation. Inflation is easing but remains above the target. Consumer inflation came in higher than expected at 3.2% y-o-y in March, while consensus was for 3.1%.
The headline German ZEW Economic Sentiment Index exceeded expectations and jumped to 42.9 in April, from 31.7 in March. Consumer confidence mildly improved from -80.5 to -79.2 in April. The Eurozone ZEW Economic Sentiment Index improved to 43.9 in April, significantly higher than the March reading of 33.5, and the market consensus of 37.2.
Editor: Lisette IJssel de Schepper
Tel: +27 (21) 808 9777
Email: lisette@sun.ac.za
Click here for previous editions of this publication.
Please refer to the glossary on the BER website for explanations of technical terms.
Friday, 19 Apr 2024
